Estate Planning can have more twists and turns than a bobsledders training run, but without knowing the course ahead, those on the ride are likely to fall off and get hurt. In the 2nd part of this series, we explore some of the head-scratchers in planning for a desired, fair and equitable distribution of assets to beneficiaries on the passing of a loved one. Be sure to revisit part one of this series if not done so already, which you can find at this same site, and deals with some of the operational matters upfront.
Before skipping a few technical yet inciteful paragraphs and rushing to this article’s end to find out the equitable distribution solution, I need to disclaim that there is no golden answer. Like a forecast, it will be out of date the minute you approve it. But without it, you could have created a bloodied butcher’s floor for those left to negotiate the divvy up. There are of course 3 scenarios someone should accept in their estate planning, and they are:
- What do you wish to happen with the distribution of your worth\affairs?
- What do you really think will happen in the distribution process once the beneficiaries bang heads?
- What will actually happen, which of course arises if there is ever any discontent over a perceived unfairness?
Sadly, a perceived unfairness amongst siblings will frequently arise, whether or not verbalised. More often than not, payments or advances over time for education\tertiary fees, house\business deposits, living arrangements, health care, etc. aren’t always recorded and aren’t ‘time fair valued’ across those payment dates. How is this time inflation considered (i.e., is the receipt\access to Family Trust funds earlier than when other beneficiaries enjoy distributions worth more)? Canvasing siblings over future ownership desires of family bach’s, investment property(s), collection interests (e.g., cars, cellars, art), share portfolios, etc. can reduce the risk of disharmony, however valuing these assets is the tough part, including keeping values current so that any distribution allocation remains equitable.
Whilst cash investments, share portfolios, and possibly real estate can be fair market valued, it comes a little more complex when assessing the fair value of shares in a privately held business that a sibling(s) may still be working in. How do you assign a value to the goodwill of the business when part of that intangible asset may have already been contributed\derived from the actions of the working sibling(s), but not all siblings? How do you make sure they aren’t penalized, assuming they will be the likely beneficiary of those shares, and any other siblings may receive cash or property assets instead? Is there a premium for receiving cash investments\assets due to the immediate liquidity and reduced risk in realizing full value?
One way around this is to have the company(s) valued by an independent ‘as at’ a value today, or earlier, that all parties can agree on, and after allowing for a discount\markdown for any contributions to business value that may have been derived by the current working beneficiaries. What this may do is allow for any increase in share value, derived solely from that beneficiary’s efforts to be reduced (or perhaps omitted\ignored) when resetting the share value as at the time of estate distribution. This means that the working beneficiary(s) of those shares may not be penalised for any intangible upside (increase in share value) they may have personally contributed when undertaking the eventual estate carve-up.
By setting this rule, all parties could be privy to the purpose and intention of the early valuation (or at least there is an audit trail to support it if not disclosed) and would be open for future discussion. It may also aid in discussions in an event where a business’s value may fall, and a beneficiary takes exception over the valuation differential. If this approach is taken, the valuation methodology and opinion should be revisited by the shareholding group regularly (e.g., two yearly) to ensure it remains current and reflects the intended purpose. Should this same approach be taken with other investment assets?
Of course, it would be naïve to suggest complications won’t arise, and issues will need to factor through. For example, what if the founder no longer works in the business, but continues to draw a healthy non-executive salary and\or dividend to cash flow their retirement? Restrictions placed on company cash flow could limit or erode business value as it reduces strategic growth options. Questions around how you would make this fair and needing to talk it through with the executive team would be necessary. Whilst it may feel uneasy, openness can have its advantages – it’s about wrestling with these types of issues upfront, while all interested parties have the opportunity for input and having clarity around why\how the distribution split may be allocated.
All parties should be aware that during the distribution of an estate process, any previous privacy of the deceased financial affairs will likely become visible, so whilst may be uncomfortable, the early timing of the estate’s exposure could prove beneficial long-term and avoid unnecessary professional fees arising from a potential inequitable distribution dispute. The central party in this visibility is clearly the person who is planning their estate, so it may be that the prickly, uncomfortable discussion starts early with them.
We’ve addressed matters for consideration surrounding the distribution of hard assets, but what about any recognition or compensation for any disproportionate time, energy, and raw costs in relation to extra palliative care? This is a hard one, especially when it’s a close blood relation (i.e., a parent), with many believing care should be provided regardless, via natural love and affection, at no cost. A mature conversation may be required between siblings, well in advance of any serious deterioration in health.
There are of course estate specific issues that may arise such as debt forgiveness, loss of imputation credits past paid taxes) in companies on distribution of shareholdings, Brightline tests, etc. that will require professional input. These matters won’t have a generic solution, so a call to your friendly advisor is a prerequisite. Whilst avoiding unnecessary professional fees is admirable, a simple oversight can be an own goal.
So, what are the learnings from these two reads on a tough topic? Plan, talk it over, take advice, plan, review, update, plan, rinse and repeat the cycle….